Case Study: Macquarie’s GBP626m Moto Refinancing Taps the High-Yield Bond Market
The Macquarie-led consortium of Australian and New Zealand pension funds that acquired the Moto motorway services chain in the UK in 2006 came under pressure in the first quarter of this year to refinance just under GBP600m of acquisition debt that was due to mature at the end of June. Some industry insiders and banking sources had expressed doubts in February that the consortium would be able to meet the Jun. 30 deadline and suggested that its bankers might consequently enforce Moto’s sale.
However, advised by Macquarie, Ancala’s Spence Clunie and AE Capital Advisers (which acted for two of the largest individual investors, the Motor Trades Association of Australia and the West Scheme superannuation funds), the owners managed to close a new debt package – made up of GBP450m of fresh secured bank facilities and a GBP176m high-yield bond – on Mar. 21. “There was a formal maturity on the existing facilities at the end of June, so we knew we faced a fairly tight timeline for getting this done,” conceded Toby Buscombe, partner and head of UK & Europe at AE Capital Advisers. “We always knew that this was going to be a reasonably challenging process.”
Pricing & Structure
The cost to the company of the high-yield bond – the first such instrument to be issued in the sector – perhaps indicated the extent of the challenge. The bond is paying a coupon of 10.25% and priced at 96.77 of par to offer a spread of 828bps over the benchmark UK Treasury (the 4% gilt maturing in 2016).
Clunie, who led the refinancing, commented: “Most of the existing [bank] syndicate were effectively shut for business and looking to reduce their loan books, hence a solution had to be found whereby we could attract new banks and maximise repayment to the existing lenders. This was achieved through a reduced senior loan – which attracted quite a number of new banks – and a subordinated high-yield bond issue.
"Moto now has a much stronger bank group and the ability to access the bond market for further capital if required,” he added. “It has also set a new positive benchmark for the rest of the industry.”
Robert Prynn, Moto’s CFO, said cost of the bond reflected its subordination to the bank debt. “It was a balance between the two, and we had to get as much senior debt as we could.”
The bond’s six-year maturity was also much closer to the tenor of the GBP355m non-amortising term loan that constituted the main element of the new banking facilities (five years) compared with similar refinancings that have taken place in the UK this year (for Anglian Water, Southern Water and Thames Water).
In those cases, however, the bonds were issued out of larger programmes that are intended to take out the bank debt in the near future. By contrast, Prynn said that his company was not imminently looking to re-tap the bond market. “It really depends on where the markets are, what pricing we can achieve compared without bank debt, and how the company continues to perform.”
Triple-C Credit Rating
The shorter maturity on the Moto bond owed much to a significantly lower rating than the water company issues, the lowest of which was single-B plus. S&P’s would only assign Moto a triple-C plus rating initially, although it raised this by two notches on completion of the bond issue. The agency said the rating reflected Moto’s high debt-to-EBITDA ratio, which will be about 7.5x for the year ending Dec. 31, 2011, and the “weak” anticipated ratios over the next two years between its funds from operations and both debt and interest cover. It expects the former to be in the 5.0%-5.5% range and the latter to be between 1.5x and 1.6x. The bond’s rating also suffered from the relatively weak “business risk” score that the rating agencies had already assigned to the industry, as a result of the poor historical performance of some other UK motorway service operators, notably Roadchef. “They have some issues in terms of sales running through to profits, but we strongly contend that’s not a sector issue,” said Prynn.
The cost of the bank element of the refinancing is considerably lower, however, given the current level of Libor rates. The margins start at 325bps over the benchmark and rise by 25bps each year to reach 425bps in year four. The overall cost of the refinancing is consequently well below that of equity. Buscombe maintained that “ultimately an economic funding solution has been achieved that materially de-risks the investment for shareholders”.
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